islamic banking instruments in apllying of letter of credit (lc)
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ADVANCED FIQH MUAMALATISB 548
ISLAMIC BANKING INSTRUMENTS IN APLLYING OF LETTER OF CREDIT (LC)
Prepared By:
Huzaimah Bt. Jaimin 2011256756Eka Pusmawati Bt. Abd. Wasir 2011812488Sofiah Bt. Arip 2011401738Smelta Ak Judi 2011829212
IMPORT Letter Of Credit-i (Lc-i) Trust Receipt-i (Tr-i)Accepted Bills –I (Ab-i)
PURCHASESWorking Capital Financing-i (Wcf-i)
EXPORT/SALESBills Purchased (Bp-i)Export Credit Refinancing – I (Ecr-i)
OTHER FACILITIESBank Guarantee (Bg-i)Shipping Guarantee (Sg-i)
Islamic Trade Finance Product
ISLAMIC TRADE FINANCE Letter of Credit - i
Islamic letter of credit (ILC) is a written undertaking given by the Islamic bank to the seller (beneficiary) at the request and on the instruction of the buyer (the applicant) to pay at sight or at a determinable future date, a stated sum of money within prescribed time limit and against stipulated documents which must comply with term and condition. An Islamic ban may offer ILC under the some Shari’ah contract namely Murabahah (cost-plus profit), Musharakah (partnership) and Wakalah (agency).
Uniform Customs and Practice for Documentary Credit International Chamber of Commerce Publication 600 (2007 Revision )
narrated from Abu Said Al Khudri, the Prophet S.A.W. said:
“gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt,
like for like, and hand-to-hand. whoever pays more or takes more has indulged in Riba. the taker and giver
are alike (in guilt).
RIBA IN THE SUNNAH
Murabahah (Cost-plus Profit)
A document of trust signed by the importer, the strength on which the bank allows the
importer to obtain release of the merchandise but making a lump sum
payment at a later date
Under the principle of Murabahah (cost plus profit) where the customers is unable to pay the purchase
price, the bank issues the ILC and pays the purchase price to the exporter. The bank
immediately sells to the customer at a mark up for a deferred payment. The model of murabahah letter
of credit as follow :
Murabahah Islamic Letter of Credit
1) The customer inform the Islamic Bank of his ILC requirement and requests the Islamic bank to purchase or import the goods indicating that he would be willing to purchase the goods from Islamic Bank upon negotiation of the ILC on the principle of Murabahah concept.
2) The Islamic Bank appoints the customer as its agent to purchase the required goods on his behalf.
3) The Islamic Bank establishes the ILC and pays the proceed to the negotiating bank utilizing its own funds.
4) The Islamic Bank sells the goods to the customer at a sale price comprising its cost and profit margin under the principle of murabahah for settlement on deferred term
5) The customer takes possession of the goods and disposes of them in the manner agreed.
Modus Operandi of MURABAHAH in Islamic Letter of Credit
Customer Informs The Bank Of His LC Requirement And Request Bank To Purchase The Goods.The Bank Retains The Legal Title To The Goods BUT Relinquishes Physical Possession To The Buyer Or Importer.Buyer/Importer Acts As Trustee Or Agent Of The BankBuyer/Importer Dispose The Goods And Repays The Bank
SP = FV [1 + {r x t)]---------36500Note:Sp = Selling PriceFv = Invoice ValueR = Mark-up Rate Or Annual Rate Of ReturnT = Tenor
MUSHARAKAH
Islamic bank issues the ILC and both the
bank and customer contribute to the purchase
price under ILC, and later share.
The procedures of the sale of the asset
based on the pre-agreed profit sharing ratio.
Losses are born proportionate to the capital
contribution.
1. The customer informs the Islamic bank of his ILC requirement and negotiates the terms of musharakah financing for his requirement.
2. The customer places with the Islamic bank a deposit ofr his share of the cost of goods to be purchased or imported as per the musharakah agreement which the Islamic bank accepts under the principle of wada’ah yad dhamanah.
3. The Islamic bank establishes the ILC and pays the proceeds to the negotiating bank, utilizing the customer’s deposit as well as its won shares of financing.
4. The Islamic bank releases the documents to the customer.
5. The customer takes possession of the good and disposes of them in the manner agreed.
6. The Islamic bank and the customer share the profit from the venture as provided for in the agreement
Modus Operandi MUSHARAKAH ILC
Advantaged
Customer shares the profit from
the venture as provided in this
agreement
The absolute return on the
investment depends on the
profitability of the venture.
WAKALAH
Islamic letter of credit, the customer must pay in advance the full value of the item in question prior to the issuance of the ILC.
Furthermore, the Islamic bank will receive a commission or service fee upon the service rendered to the customer.
1. The customer informs the Islamic bank of his ILC requirements and requests the Islamic bank to provide the facility
2. The Islamic bank may require the customer to place a deposit to the full amount of the price of the good to be purchased or imported, which the Islamic bank accepts under the principle of Wadiah Yad Dhamanah
3. The Islamic bank established the ILC and pays the proceeds to the negotiating bank, utilizing the customer’s deposit, and subsequently release the documents to the customer
4. The negotiating bank claims reimbursement from the Islamic bank as per the reimbursement instruction.
5. The Islamic bank charges the customer fees and commission for its services under the principle of al-ujr based on the Wakalah principle.
Modus Operandi On WAKALAH ILC
Advantaged
To ensure buyer receives merchandise on time and
payment made upon receipt of complied document.
From islamic point of view, zakat fund of the islamic
banks will help the muflis. So, there will be no
auction of assets of the muflis unless he surrenders
himself.
Therefore, this explicitly shows the beauty of islamic
banking system in protecting its ummah.
THANK YOU
ANY QUESTION??